While acknowledging its guidance is at risk after weaker-than-expected first-quarter results, which he called a “choppy start of the year,” National Bank Financial analyst Maxim Sytchev thinks shares of Ag Growth International Inc. remain undervalued “from [an] absolute vantage point,” especially following a 13.7-per-cent drop in price on Tuesday.
“This is the third share price rollover that we are seeing since early 2023,” he said. “Yes, the print was not great, especially in light of lowering the bar ahead of the quarter. Yes, all growth is now H2/24E-weighted, which always raises a spectrum of skepticism. Yes, AFN shares were up 22 per cent year-to-date before the print – now up 6 per cent (vs. up 5 per cent for the TSX) and Deere & Company (NYSE: DE; Not Rated) shares flat year-to-date; we will be hearing again about the difficulty of decoupling from the ag cycle.
“One can also take apart the guide and the language around 18-19-per-cent EBITDA margins in 2024 and likely a more challenging path towards $310-million in EBITDA. At the same time, this is a more focused entity now, with a much stronger balance sheet and organic capital deployment optionality (as we are seeing in India). Farm/food is not a spectacular market but defensive (over the long term, depending on where soft commodities land). At 11 times 2024 estimated P/E, we believe AFN shares represent a good value now.”
In a research note titled Tactically, not a great look; from an absolute perspective, we see value AFN, Mr. Sytchev thinks the Winnipeg-based company’s “transition in the business mix” is likely to weigh on results through the first half of the year, but he says “a 200 basis points structural margin improvement and thematic tailwinds” reaffirmed his positive stance on the future.
“Management reiterated its target of at least $310-million of EBITDA for the full year with a margin of close to 19 per cent (implying mid-single-digit revenue growth), with the year-over-year-increase expected to materialize entirely in H2/24 (implying a moderate year-over-year decline in Q2/24 vs. $88-million in Q2/23); we are below the guide now,” he said. “The improvement in the back half of the year is contingent on the delivery of Commercial portfolio projects, though we should note that margins here are structurally lower, suggesting some measure of downside risk to guidance (we have trimmed our estimates to relatively conservative levels; a higher mix of permanent vs. portable sales in Farm is likely to weigh on margins). All in, management expects slightly more than 54 per cent of 2024 earnings to come from the back half of the year. Longer-term operational improvements in the business suggest that 18 per cent to 19 per cent is a reasonable through-the-cycle EBITDA margin.
“The breadth of organic growth avenues remains attractive. India continues to be the most attractive avenue for organic growth initiatives as product transfers accelerate and accelerating portable grain handling equipment sales improve margins further. Parts and service offerings are being rolled out in North America and are expected to begin in Brazil over the next few years, which should improve revenue visibility as well as the magnitude and predictability of margins. AFN has also begun to roll out its digital offerings in Brazil and management cites positive customer feedback in the early stages of the initiative”
Maintaining his “outperform” recommendation for Ag Growth shares, Mr. Sytchev trimmed his target to $77 from $82. The average on the Street is $79.11.
“We reiterate our Outperform rating given the 40-per-cent upside (even though we adjusted the NAV down on higher capex assumptions and working capital movements that are impacting 2025E net cash balance),” he said.
Elsewhere, other changes include:
* ATB Capital Markets’ Tim Monachello to $81 from $85 with an “outperform” rating.
“While AFN’s H1/24 results are expected to be impacted by shifting Commercial project schedules and softness in U.S. Farm activity, we believe AFN continues to benefit from longer-term structural tailwinds including product transfers, operational excellence initiatives, and deleveraging that we believe underpin its long-term value proposition for investors,” he said. “Still, AFN shares could face pressure as investors weigh the implications of its weakened near-term outlook. Given reduced near-term estimates we adjust our price target ... We maintain our Outperform rating given AFN’s attractive valuation and long-term positioning.”
* Desjardins Securities’ Gary Ho to $78 from $86 with a “buy” rating.
“While 1Q was noisy (softer North American Farm and Commercial project delays), we believe the negative 11–12-per-cent share price reaction is unwarranted given AFN’s robust order book (provides 2H visibility) and 2025 growth initiatives (which are gaining momentum),” said Mr. Ho.